Question

Mogadore manufacturing had a 1.25 operating leverage factor when sales were $60,000. The company's contribution margin ratio was 25%. What were the company's fixed expenses?

Answer 1

To find the fixed expenses, we can use the formula for operating leverage and the given information about sales, contribution margin, and operating income.

Step-by-step explanation:

Operating leverage is a measure of how sensitive a company's profits are to changes in sales volume. It is calculated by dividing the contribution margin by the operating income. In this case, we are given that the operating leverage factor is 1.25 when sales were $60,000. The contribution margin ratio is given as 25%.

To find the fixed expenses, we can use the following formula:

Operating Leverage = Contribution Margin / Operating Income

From the given information, we can calculate the operating income as follows:

Operating Leverage = 1.25 = 0.25 / Operating Income

Operating Income = 0.25 / 1.25 = 0.20

Now, we can calculate the fixed expenses:

Fixed Expenses = Sales - Variable Expenses - Operating Income

Fixed Expenses = $60,000 - ($60,000 * 0.25) - ($60,000 * 0.20)

Fixed Expenses = $60,000 - $15,000 - $12,000

Fixed Expenses = $33,000